Parents warned on perils of helping children get on the housing ladder with guarantor mortgages

Parents desperate to help their struggling children get a foot on the property ladder should think carefully before agreeing to guarantee their mortgage repayments.

Increasing numbers of first-time buyers are turning to their family to ask them to act as guarantors on a home loan in the hope this will encourage banks to lend them more money.

High deposits and tough rules on lending mean many young borrowers who want to buy a home are being turned down by the banks.

Property ladder: Parents giving their children a leg-up with a guarantor mortgage may not realise what they are signing up to.

A guarantor gives the bank an additional safety net because they know someone will cover the bill should things go wrong. They do not need to actually repay the mortgage, but promise they will if the buyer falls behind with their repayments.

However, most guarantor mortgages are for full liability, meaning the parent will be held responsible for the entire debt.

‘Guarantor mortgages are best suited to first-time buyers who expect their income to increase substantially over the next few years,’ says David Hollingworth, director of London & Country.

‘Someone training to be a solicitor or doctor, for example, might not earn enough now to get the mortgage they want straight away, but this will change in just a few years when their income jumps.’

How guarantor mortgages let you borrow more

A first-time buyer with a £30,000 income, no other commitments and a parent earning £45,000 could potentially borrow up to £180,000 with a guarantor.

Yet on their own that same buyer would be able to borrow just £120,000, according to mortgage brokers London & Country.

If their parent were paying off a £50,000 mortgage of their own as well, they could guarantee £130,000 for their child.

With a guarantor mortgage, parents or grandparents are not required to pay a penny upfront and will not usually be named on the mortgage — so they will not have to worry about a liability for capital gains tax.

However, their disposable income is used to help calculate how much a first-time buyer can borrow.

The bank will normally want to see that the parent could afford their own mortgage and that of their child, if needed.

This can often prove a stumbling block. Also if parents wanted to buy a bigger house at a later date they might find the guarantor mortgage could stop them from moving.

Increasingly banks are limiting how much older homeowners can borrow. Many will no longer lend to people aged over 70.

Young buyers with older parents may find they are allowed to have a mortgage term of only ten to 15 years instead of the usual 25-year term, meaning much higher monthly repayments.

Market Harborough offers the best full liability guarantor deal. Borrowers with a 10 per cent deposit can get a variable rate of 3.99 per cent (1.5 per cent below building societies’ standard rate of 5.49 per cent). Repayments on a typical £150,000 loan would be £791 a month.

The best limited liability deal, where you are responsible for only part of the loan, is from The Mortgage Works for borrowers with a 15 per cent deposit. Repayments would be £952 a month on £150.000.